What is Seller Financing

Understanding Seller Financing in M&A Transactions

Seller financing is one of the most important—yet misunderstood—deal terms in a business sale. Whether you're buying or selling a business, it's crucial to understand how seller financing works and how to use it strategically.

What Is Seller Financing?

At its core, seller financing is like an IOU from the buyer to the seller. Instead of receiving the full purchase price upfront, the seller agrees to receive a portion of the payment over time—often monthly or quarterly—with interest. Think of it as the seller acting like a bank for the buyer.

This is common when:

• The business can't be easily financed by a bank

• The buyer wants to preserve capital

• There's a financing gap that needs to be bridged

Seller financing is typically 10–30% of the total deal value, with 10% being a common benchmark accepted by lenders like the SBA or Canadian banks.

Why Do Buyers Use Seller Financing?

Buyers use seller financing to:

• Reduce the amount of upfront capital required

• Improve return on investment by leveraging debt

• Make deals more attractive without raising equity

Professional buyers and private equity groups regularly use seller financing to optimize deal terms.

Another common M&A deal structure is the earn-out—watch our video to learn how buyers use earn-out strategies to bridge valuation gaps here.

What Do Sellers Need to Know?

Seller financing isn’t risk-free. Sellers need to:

• Ensure they receive a fair interest rate (typically 5–10% depending on market rates)

• Clarify the term length (often 24–48 months)

• Secure the note with collateral or personal guarantees

A good M&A advisor and legal counsel will help structure the deal to protect your interests while keeping terms buyer-friendly.

What are the risks of Seller Financing?

While seller financing introduces risk, default rates in Canada and the U.S. for these types of loans are low. With proper terms, clear recourse, and a strong buyer fit, seller financing can be a win-win for both parties—and can often be the factor that closes the deal.